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How does Mighty River Power stack up?

Australians will have the opportunity to buy into a newly listed kiwi electricity company from about May 10, the expected listing date of New Zealand government-owned Mighty River Power (NZX: MRP) (ASX: MYT). The sale is part of the government’s plan to sell minority stakes in state assets to fund future public capital projects like schools and hospitals.

Interest from investors in the small hobbit-loving country has been huge, with pre-registrations for shares reaching 440,000 by registration close, a fact the government is keen to take advantage of if the price range of the initial public offer is anything to go by. Shares will be offered to New Zealand public investors for between NZ$2.35 and $2.80, although that price could be pushed higher by demand from institutional investors. Given the strong interest this is no small probability. The listing of Contact Energy (NZX: CEN) in 1999, which is now majority owned by Origin Energy (ASX: ORG), had an indicated range of NZ$2.40 to $3.00, but was sold at $3.10 because of high demand.

The price range for Mighty River puts the company at a price to earnings (P/E) ratio of between 20.5 and 24.4 for expected 2014 earnings and a dividend yield of 6.4% – 7.7%.  For a company with limited long-term growth prospects and significant risk still hovering over the pricing of electricity in NZ resulting from the possibility Rio Tinto (ASX: RIO) will close an aluminium smelter in the country, the price hardly screams “bargain”.

But how does this stack up to other electricity companies?  Origin Energy, which is currently developing the mega APLNG project set to come online in 2015, is currently offering a dividend of just under 4% and a P/E ratio of 15 based on full year 2012 earnings.  AGL Energy Limited (ASX: AGK), Australia’s second largest gas and electricity retailer offers an almost identical dividend yield just shy of 4% and a P/E of 15.6.

Company

Price/Earnings Ratio

Dividend Yield

Dividend Policy (% of NPAT)

Mighty River Power 20.5-24.4 (forecast FY14) 6.4-7.7% (Forecast FY14) 90-110%
Origin Energy 15 3.9% 60%
AGL Energy 15.6 3.9% 60%
Contact Energy* 18.6 6.3% 80%

*53% owned by Origin Energy.

By both accounts Mighty River would represent a premium dividend in the immediate term, but lacks significant growth opportunities. This is reflected in the dividend policy to be instigated by the board of Mighty River Power, which will be between 90-110% of adjusted net profit after tax (NPAT). This compares to AGL’s policy of around 60% of underlying NPAT. Likewise, Origin’s current policy is to offer the higher of $0.50 per share or 60% NPAT.

Foolish takeaway

The initial pricing of the Mighty River offer certainly looks set to take advantage of strong demand for high yielding dividend stocks. It is not without risk, and though it may be attractive for some investors as an alternative to the current low returns on offer for cash bank accounts, may not meet the needs of long term investors looking for exceptional value and a clear strategy to increase earnings and grow dividends.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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